Middle East airlines to reap highest profits ever

Performance in 2013 is considerably better than the $7.4 billion net profit of 2012.

Middle East carriers are expected to post profits of $1.6 billion in 2013, which is marginally ahead of the $1.5 billion previously forecast[2], International Air Transport Association (IATA) said Monday in its revised 2013 global industry outlook.The region’s efficient hubs continue to support strong performance on long-haul markets. And the impact of the Syrian crisis[3] has been limited. Passenger demand is expected to grow by 10.5 percent, the strongest among all regions. But this will be slightly outstripped by capacity growth of 11.3 percent.IATA revised its 2013 global industry outlook downwards to $11.7 billion on revenues of $708 billion. Airline performance continued to improve in the second quarter; however at a slower pace than was expected with the previous projection (in June) of $12.7 billion. This reflects the impact on demand of the oil price spike associated with the Syrian crisis and disappointing growth in several key emerging markets.Performance in 2013 is considerably better than the $7.4 billion net profit of 2012. The upward trend[4] should continue into 2014 when airlines are expected to return a net profit of $16.4 billion. This would make 2014 the second strongest year this century after the record breaking $19.2 billion profit in 2010.“Overall, the story is largely positive. Profitability continues on an improving trajectory. But we have run into a few speed bumps. Cargo growth has not materialized. Emerging markets have slowed. And the oil price spike has had a dampening effect. We do see a more optimistic end to the year. And 2014 is shaping up to see profit more than double compared to 2012,” said Tony Tyler, IATA’s Director General and CEO.For the year 2014, IATA forecast that all regions will see improved profitability, but divergence in performance will remain. Middle East carriers were expected to post a $2.1 billion profit (their highest ever) next year.Airline performance remains strong. This year (2013), airlines were expected to post the same operating margin (3.2 percent) as in 2006, even with a 54 percent hike in jet fuel prices. The industry has been able to absorb this enormous cost increase as a result of changes in the industry structure (through consolidation and joint ventures), increased ancillary sales and reduced new entry due to tight financial markets. Moreover, the industry is expected to have a relatively good year even with global economic growth at 2.0 percent. Previously 2.0 percent gross domestic product (GDP) growth was considered the point below which airlines posted losses.For 2014, IATA forecast that global airlines were expected to see a significant boost, with profits of $16.4 billion on revenues totaling $743 billion. Rising business and consumer confidence levels should indicate an uptick in the global business cycle (2.7 percent GDP growth is expected) which has a direct impact on airline profitability. Oil prices are expected to fall to $105/barrel (Brent, from $109 expected this year) on the back of reduced geo-political tensions and an improved US energy outlook. A fall to below $100 would be expected from normal market forces. But the OPEC cartel is preventing the full realization of the benefits of better supply prospects. Furthermore, the benefits of improving market structures on several regions are expected to continue to drive performance and consumer benefits.We expect slightly more robust passenger growth[5] (5.8 percent) and a significant improvement in cargo growth to 3.7 percent. Yields, however, for both passenger and cargo markets are expected to continue to fall by 0.5 percent and 2.1 percent respectively. 2014 is expected to be particularly strong for North American carriers ($6.3 billion net profit, the industry’s strongest) as the economy improves. Capacity discipline is expected to see yields improve, bucking the global trend. European carriers are also expected to see a near doubling of profits to $3.1 billion (although even this will only generate an EBIT margin of 1.9 percent with only African carriers being lower). Asia-Pacific is expected to see a modest improvement in profitability to $3.6 billion, largely on the back of improved cargo performance, the growing Chinese domestic market and the benefits of restructuring in Japan. Carriers in Latin America are expected to see profits rise to $1.1 billion. African airlines are also expected to return a combined profit of $100 million.Even with the significant improvements expected for 2014, an industry profit of $16.4 billion implies a return on invested capital of just 5.2 percent. That remains significantly below the industry’s weighted average cost of capital which is hovering between 7 percent and 8 percent. “Airlines are demonstrating that they can be profitable in adverse business conditions. Efficiencies are being generated through myriad actions—consolidation, joint ventures, operational improvements, new market development, product innovations and much more. When market forces drive action, we get results that both strengthen the industry and benefit the consumer. Quite simply, stronger airlines can invest more in improving connectivity and service innovations. If more policy makers incorporated that into the cost-benefit analysis when developing regulations, we would have a much healthier industry generating even broader economic benefits,” said Tyler. The balance between profit and loss remains delicate despite the forecast improvement for 2014. “A $16.4 billion profit for transporting some 3.3 billion passengers means that airlines will retain an average of about $5.00 per passenger. That very simple calculation demonstrates that even a small change in the operating environment—a new tax or other cost increase for example—could change the outlook quite significantly,” said Tyler.